Several days ago a secret 2012 plan to take over BlackBerry (BBRY) surfaced, and from the look of things, it was taken as a negative by the market. However after looking at this plan in detail, I am convinced of the long term value proposition for BlackBerry even more than ever.
The slides are presented by Robin Chan (slides here). According to Chan, the people involved managed to raise about $1 billion for the purpose of taking BlackBerry private, but were short by at least $5 billion at the time.
To begin with, the takeover group (at the time of this presentation) valued the assets of BlackBerry about $8 billion or about $15 a share. My first observation is that the value of the assets are valued at breakup cost. Sometimes the sum of the parts is worth less than the whole. Synergies always add value, and I think that applies to BlackBerry's case.
The presentation also takes into account BlackBerry's cash position of $2.2 billion, but today that cash position is about $3 billion. Also, the plan assumes a $1 billion loss to fix the hardware business (devices). I think I will disagree with this, since BlackBerry has successfully deployed BB10 and several devices already, without the need to spend much money. Yes the company is still selling old devices, but we knew from the start that the transition period would last about 18-24 months.
I think I will also add about $1 billion more to the assets for the patents, since I think $2.75 is probably at the low end. While we don't know what these patents are really worth unless they are sold, nevertheless I do not share the opinion they should be valued this low.
If we add it all up, one can conclude that the assets are worth an additional $2.8 billion more than the presentation. In dollar terms that comes out to $10.8 billion or about $21 a share. However please note this does not include anything for the business, the ecosystem or any additional value that one might put on BlackBerry.
But let's not fight over a billion here or there. Even if one believes the presentation as is, the stock is still undervalued. But there is a slide in the presentation that really hits the nail.
As you can see from the chart above (with which I agree 100%), BlackBerry is the only company that offers both premium devices and caters to the enterprise segment. As you can see, BlackBerry is alone in the upper right hand side quadrant. Personally I agree with their logic. As because BlackBerry is alone (still today to a great extent), it has a very big opportunity to grow in this segment because they have very little (if any) competition.
The second slide that is interesting is the one below.
See the people who made this plan estimated that if all went according to plan, they might end up making as much as ten times their money over a period of 5 years. Yes that's correct, their logic was that a ten bagger was possible.
However, in order not to get your hopes up, I will focus on the lowest possible potential for profit, according to the presentation. As you can see in the table above, all that is needed for BlackBerry's stock to reach $31 a share, is about $2.5 in earnings, which is actually the lowest of all targets.
The question is, can BlackBerry make $2.5 a share? The answer is that the potential for such earnings are definitely there. In fact I would say that almost any company with revenue of $12 billion can make about $1.25 billion in after tax profit.
BlackBerry can definitely make even more, but they will have to work at it and get their act together. The assets are there, the products are there and the near monopoly in the enterprise space is also there. Can management pull it off? No one has the answer, but the potential is there.
When investing, we play with the probabilities. We do not know what will happen in the future and we do not know if our estimates and calculations will come out true or not. But as long as the probabilities are on our side, we stand to benefit.
In the case of BlackBerry, I will agree with the presentation above that the possibility for a ten bagger, over a period of five years is possible, if the company concentrates in the enterprise space and management executes.
Whether management can execute (or not) and return value and profits to shareholders remains to be seen. However, even if management executes the bare minimum, shareholders will still benefit.